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This is the Sharenet company blog where we will bring you the latest news and events on the go at Sharenet, together with tips on using our site and our products.

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    Seed Weekly - Anglo American plc – Investor day outlines opportunities


    Anglo American is one of the largest diversified mining companies in the world, with operations spanning bulk commodities, base metals and precious metals across the globe. The company is synonymous with mining in South Africa, and can trace its roots back to 1917 when it was founded by Ernest Oppenheimer with £1 million in capital from UK and US sources.

    In 1926 Anglo became the largest single shareholder in the De Beers diamond company, kicking off a long period of expansion and acquisitions. In 1961 Anglo made its first major investment outside Southern Africa by investing in the Hudson Bay Mining and Smelting Company in Canada. The group entered the steel industry in 1967 with the acquisition of Scaw Metals, and established the Mondi Group in the same year to ensure exposure to the paper and pulp industry.

    In 1999 Anglo merged with its Luxembourg-based affiliate Minorco to form Anglo American plc, with its primary listing and headquarters in London and secondary listings in Johannesburg, Switzerland, Botswana and Namibia. The group has since focused on streamlining its assets and concentrating on its core mining portfolio. Measures taken include the demerger of the Mondi Group and the sale of Anglo’s shareholdings in AngloGold Ashanti, Highveld Steel and Vanadium, Namakwa Sands, Tongaat Hulett and Hulamin.

    Investor day

    At a recent investor day, Anglo has outlined the current context in which it operates, presented their asset reviews and operational priorities and put forward a strategy to improve its Return on Capital Employed (ROCE).

    Operational Context

    In the six years up to 2012, the estimated industry ROCE has dropped significantly from 24% to 10%. Anglo attributed the decline to the following factors:

    • Commodity prices dropped from 10 year highs
    • Companies over capitalised their assets in pursuing growth at any cost
    • Takeovers “at any price” driven by desire to dominate markets
    • Operating costs increasing reflecting(1)Deeper operations and lower mining grades; (2) Lack of planning and execution discipline and (3) Lack of control on discretionary spending.
    • Projects overspent and behind schedule as detail lost in “need for speed”

    Anglo believes its diversified and high quality commodity portfolio is a distinct competitive advantage that makes it the only truly diversified miner. In the graph below, Anglo’s 2012 Earnings Before Interest, Tax, Dividends and Appreciation (EBITDA) is split by the various underlying commodities and compared to 4 industry peers.

    Over the last four years, the average capital employed by geography have moved slightly
    from South Africa towards Australia and South America, a trend that is expected to continue as future growth is expected in the latter regions.

    Asset Review

    Anglo has reviewed all its operating assets across the globe in an attempt to identify key risks faced by each asset and to determine each asset’s full potential. A “Pathway to Value” methodology was proposed whereby each asset is first improved from an operational perspective and then from the management side.

    The contribution to Anglo’s 2012 earnings is skewed heavily towards 13 of the group’s 57 assets, with Kumba being the largest contributor. The challenge ahead is to improve the contribution of the “Wave 3” assets in the graph below.

    Return on Capital Employed

    In its 2013 interim results presentation, Anglo has set out a strategy for improving its attributable ROCE from 8% to 15% or more by 2016. Management has identified ongoing capital expenditure and operational risks as possible detractors, and their current projects and further operational improvements as future positives.

    In the latest presentation, Finance Director René Médori has reiterated that the target is realistic and that optimal capital expenditure, reduced overheads and unlocking of supply chain benefits will be key to achieving success.

    Seed believes that the turnaround of the struggling giant under new CEO Mark Cutifani and his quality management team is well under way, and we hold Anglo’s at a 2.5% weight in the Seed Model Share Portfolio.

    Kind regards,
    Cor van Deventer

    Seed would like to use this opportunity to wish all our faithful readers a very blessed Christmas.

    021 914 4966

    Permalink2013-12-19, 15:20:47, by Mike Email , Leave a comment

    Seed Weekly - Structuring Your Income at Retirement

    This week we take another look at how to optimise your investments given the current legal and regulatory environment.

    Retiring is one of life’s major events. In a way it is the culmination of your years spent at the grindstone and finally being able to fully enjoy the fruits of your labour. The road to retirement is filled with planning saving and compromises and, if not structured correctly, could lead to problems.

    The 1st decision the near retiree needs to make is whether to invest your compulsory assets in a living annuity (ILLA) or to buy a guaranteed life annuity from a life insurance company. The difference is one I’m most readers would be familiar with; the value of the ILLA at any time is a factor of the capital invested, the percentage drawn out as an income, and the performance of the underlying investment, while the guaranteed annuity is a fixed payment for the rest of your life.

    You are able to withdraw 1/3rd of your pension fund and retirement annuities in cash (provident funds can be taken fully in cash) at retirement but, because of taxes on the lump sum option, it requires some thought as to what amount should be taken.

    Another source of capital should be your discretionary assets, the assets that fall outside your pension and provident funds and retirement annuities. The assets that fall under this category will, for the purposes of simplicity, be limited to local and offshore unit trusts and share portfolios. Owning a large pool of these assets can be beneficial to you thanks to favourable tax treatment of these assets on disposal. When drawdowns are made out of this asset pool you are taxed on your capital gains and dividends received. The taxes on discretionary drawdowns are in most instances less than on your compulsory assets. The below charts show how long R 5m would last if you needed R 20 000 per month as an income from either discretionary or compulsory assets:

    Drawdowns from compulsory:

    Drawdown from discretionary:

    The difference is because the compulsory assets require you to draw a higher gross amount to still get the same amount out net of taxes. The liabilities line in the graphs refers to the amount of assets needed in a tax free world at any time to fund your drawdowns of R 20 000 per month.

    The logical conclusion would be to keep your compulsory asset drawdown to a minimum and take the balance from your discretionary assets, but keep in mind that you can draw R 104 611 (excluding rebates) annually from your compulsory assets without incurring tax and depending on your age receive annual rebates. You also have a R 30 000 per year exclusion from the gains on your discretionary assets. It is therefore imperative to structure your assets before retirement in such a way as to take maximum advantage of both these annual tax benefits when you retire.

    Conventional advice would usually be to draw the minimum of 2.5% per annum from your compulsory assets and the balance from your discretionary assets. This is in no way a one size fits all solution and should be tailored to fit your unique financial circumstances. At Seed we believe this decision materially impacts your financial situation and we make every effort to ensure we ‘stretch’ your assets as far as possible into the future.

    Kind regards,

    Stefan Keeve

    021 914 4966

    Permalink2013-12-11, 10:32:57, by Mike Email , Leave a comment

    Seed Weekly - Making use of the CGT Exclusion

    A while back I had an interesting conversation with a friend. Every year she sells a portion of her unit trust investments and then immediately reinvests the proceeds into the same fund. Her rational behind this is that every year SARS provides you with Capital Gains Tax (CGT) exclusion and you can use this exclusion to increase the base cost of our investment and reduce your future CGT liability.

    How are capital gains calculated?
    You make a capital gain if you dispose (sell) and asset for more than the original price (base cost). A simple example is:
    • Invest R 1 000 into a unit trust
    • Sell the unit trust for a total value of R 1 700.

    So can you actually decrease your future CGT by selling a portion of your investment and reinvesting it immediately?

    For ease of calculation I have made the following assumptions:
    • The investment is a unit trust.
    • The returns of an average equity unit trust are used.
    • There are no transaction costs.
    • One is able to sell and buy the exact same unit trust on the same day.
    • Distributions and reinvestments by the unit trust are not taken into account.

    I did the calculation on the different sizes of initial investments. Every year you sell a portion of your investment where the CGT is equal to that tax year’s exclusion. In 2006 the exclusion was R 10 000, this tax year it’s R 30 000.

    The chart below illustrates how the base cost increases every year for the different portfolios compared to the unit price of underlying investment and base cost of not selling.

    You derive the biggest benefit when the portfolio is smaller. The new base cost is calculated using the weighted average of the previous year’s base cost and the price of the “new” investment. With a smaller portfolio you are able to sell a higher ratio of the units and increase the base cost more effectively.

    The graph below shows the unrealised capital gains (The capital gains you would make if you were to sell 100% of your portfolio.) for the different portfolios at the end of the 8 year period.

    With a R100,000 portfolio it was possible to reduce the unrealised capital gains by 98%, with the R500,000 portfolio by 23% and the R1,000,000 by 12%.

    By increasing the base cost of the investment in line with the current price of the unit trust you are able to reduce the unrealised capital gains on the investment and ultimately your CGT liability when making a full disposal of the investment.

    This is a very simplistic discussion about how to reduce your CGT liability and makes quite a few assumptions. In reality we would guess that the benefit wouldn’t be as great as illustrated. This strategy would also require a very disciplined investor to put the trades through timeously each year and reinvest the full proceeds from the disposal. It is also very evident that the benefits of this strategy reduce as your portfolio grows.

    Kind regards,

    Gerbrandt Kruger

    021 914 4966

    Permalink2013-12-03, 12:16:01, by Mike Email , Leave a comment